Genuine interest in digital assets has been increasing as consumers and institutional investors realize attractive investment opportunities offered by the distributed ledger technology. Despite this interest, there are concerns from potential investors that stem from risks such as hacks and fraud that have manifested themselves in the industry.
Naturally, governments have stepped in to protect consumers from such vices by creating regulations which industry players are required to observe. Unfortunately, efforts such as these have contributed to stifling crypto innovations within their jurisdiction and have led to companies shifting operations to countries such as Malta which have a more favorable operating climate.
It is for this reason that industry players have come together to offer an alternative solution to governments through self-regulation. It was, therefore, good news when Japan’s Financial Services Agency (FSA) announced that it had given its approval for the cryptocurrency industry in the country to regulate itself.
In March this year, sixteen crypto-exchange companies formed the Japan Virtual Currency Exchange Association (JVCEA) and drafted a proposal to the FSA with the aim of self-regulation. This came as a result of the companies’ efforts to regain investor confidence after over $500 million was lost after the Coincheck and Zaif hacks.
Under the approval, the JVCEA will have the power to safeguard customer assets, regulate the sector, provide operational and compliance guidelines as well as develop in detail, anti-money laundering policies. The JVCEA will also have the power to sanction exchanges for any violations.
Nevertheless, the FSA will maintain its overall oversight role even though it has given approval for self-regulation. This is evidenced by the fact that on the day self-regulation news was made public, the FSA also published a new set of guidelines for companies that would wish to run crypto exchanges in the country.
The self-regulation developments come as a boost to Japan’s cryptocurrency industry and a lesson that stakeholders can incorporate in their regulation efforts.
Benefits of Specialization
Self-regulation will help the country address the cryptocurrency exchange hacking challenge that has occurred in the recent past. This is because the JVCEA will be in a better position to come up with anti-hacking guidelines from a technocratic perspective. But for some cryptocurrency players, it is a wait and see situation.
Joseph Oreste, CEO of Qupon says, "We’ll see what happens with JVCEA. They sprung up as a result of multiple hacks of Japanese exchanges. We’ll see how this group interacts with the global crypto community to ensure all exchanges can secure their customer data."
It has been argued that industry players, compared with governments, have the knowhow and would thus be in a better position to come up with rules and guidelines that would increase transparency and enhance consumer protection efforts among themselves. Since the industry is developing fast, the JVCEA will be in a better position to keep up with technological developments.
It will have active and constantly improved safeguards against hacking that bureaucratic governments would not be able to keep up with. Moreover, self-regulation conforms to the ideology within which distributed technology was created and, as such, cryptocurrency exchanges will act in a way in which will safeguard the industry.
Disclaimer: David Drake is on the advisory board for most of the firms mentioned or quoted in this article.